Kentucky Lawmakers Approve Bill to Give Insurers Lower Rates From Home Loan Bank

Kentucky’s General Assembly has become the only legislature so far this year to adopt a bill that could give insurers lower rates on commercial loans from the Federal Home Loan Bank system.

The Kentucky Senate this week unanimously approved House Bill 171, two months after the House passed it. The bill is now on its way to the governor’s desk.

If signed into law, the measure would give the home loan bank first priority on collateral pledged by member insurance companies, which would let the bank drop its premium charges on loans, potentially saving carriers significantly.

“This bill will allow Kentucky-domiciled insurance companies to borrow from the Federal Home Loan Bank on the same terms as Kentucky banks and credit unions do,” Kentucky Rep. Joe Fischer, R-Fort Thomas, said at a House Banking and Insurance Committee in January.

Those rates can be as low 1.6% on three-year notes, according to the FHLB.

Banks are federally regulated and backed, at least to some degree, which automatically gives the Home Loan Banks first priority on collateral when banks run into trouble. But insurers are mostly regulated by states, so the FHLB, governed by Federal Housing Finance Agency (FHFA), hit upon the state-by-state approach to remedy the discrepancy.

“A federal home loan bank shall not be stayed or otherwise prohibited by a court from exercising its rights regarding collateral pledged by an insurer member for more than 10 days following the date a temporary restraining order, preliminary injunction, or permanent injunction is issued by the court,” HB 171 reads.

Some 21 state legislatures have adopted similar laws in recent years. This year, bills were pending in at least five states, but only Kentucky’s plan has passed. Florida and Virginia lawmakers have now adjourned and bills in New York and New Jersey have seen little advancement.

The Federal Home Loan Bank system, with 11 regional banks around the country, came into being in the 1930s. It is best known for providing low-interest loans to member banks, for mortgages, to support community investment. But the banks also lend to member insurance companies that may need help with liquidity or can’t find such favorable rates in the commercial lending market.

Florida-based insurers may be the ones who could benefit the most from this type of legislation. With the state’s property insurance market in crisis, and a number of carriers posting record losses for 2021, some may appreciate lower rates on commercial paper. Eight Florida insurers are listed as members of the FHLB system. Senate Bill 1888 was introduced by Florida Sen. Joe Gruters in January but it and a similar bill in the House died in committee as the 2022 session came to a close March 11.

See a February article for more background on the legislative efforts.

Topics Carriers Legislation Kentucky